Exclusive: UK to charge special drawing rights to aid budget – sources

British Chancellor Rishi Sunak greets G-7 finance ministers in London. Photo by: Her Majesty’s Treasure / CC BY-NC-ND

While the new allocation of Special Drawing Rights slated for later this year is seen as an opportunity to provide much needed additional development assistance, the UK government may consider using the redistribution of these reserve assets as part of its goal. aid 0.5%, according to sources who have had conversations with UK officials.

The move could mean even more pressure on the already stretched budget and could result in further cuts to programs, rather than providing additional help, the sources told Devex.

The International Monetary Fund is expected to issue $ 650 billion in SDRs, a type of reserve currency, in August in an effort to help support struggling economies amid severe financial damage from the COVID-19 pandemic. It allocates SDRs to all member countries based on each person’s position in the global economy.

SDRs, sometimes compared to “free money,” are meant to provide additional liquidity to low-income countries, which have not been able to deliver the kinds of massive stimulus packages that advanced economies have offered for years. the pandemic. They were described as “the key to a global economic recovery” by the ONE campaign.

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Economists said it would cost very little for the UK government to distribute its share of SDRs to help low-income countries. But Devex has learned that the Treasury plans to charge around a third of the amount of SDR redistributed by the UK to the aid budget – which has been slashed from 0.7% to 0.5% of gross national income, triggering a series of brutal cuts – leaving even less for development and humanitarian programming.

“Why are we going to use an exceptional set of SDRs that no government has budgeted for as 0.5% or 0.7% ODA? [official development assistance] commitment that governments generally have? Said Nadia Daar, director of Oxfam International’s Washington office. “At a minimum, if they count as ODA, it has to be beyond what they would commit anyway. “

The revelation comes as the UK Parliament prepares to vote on an amendment Monday on government aid cuts. The country’s aid budget has already been squeezed twice, by a fall in the value of national income in 2020 and by reducing the expenditure target from 0.7% to 0.5% of national income, announced by Chancellor Rishi Sunak in November. Devex has followed therefore cut programs in a tracker.

The UK is expected to receive around £ 19 billion ($ 27 billion) in SDRs, although it is not clear exactly how the UK plans to use its share.

Sunak tweeted its support for a new SDR issuance as a tool that “gives additional funding to low-income countries to help them respond and recover.”

Tracking controversial UK aid cuts

Stay up to date on the effects of UK aid cuts through our regularly updated tracker.

But the question is whether the reallocation of UK SDRs, which some sources say may well be loaned through the IMF’s Poverty Reduction and Growth Fund, will be additional. The PRGT provides highly concessional or zero-interest loans to low-income countries. The PRGT and two special purpose vehicles or funds focused on the climate and COVID-19 vaccines have become the main proposals for how high-income countries could transfer their SDRs through the IMF.

The UK’s allocation to PRGT “could easily run into the billions,” said Stevan Lee, a former senior economist at the World Bank and the Department for International Development.

According to the government’s proposal, about 30% of the SDRs allocated through the PRGT would be counted as ODA, several civil society sources told Devex. While this is likely allowed under ODA rules, aid experts told Devex, it raises the question of the additionality of DTS resources.

This would mean that if the UK sent $ 6 billion in SDRs to the PRGT, $ 2 billion would go to the aid budget, according to a civil society source. “The Treasury said very categorically that it would be below the 0.5% threshold,” the civil society source said.

“On our side, we’re like, ‘Hang on a sec, Treasury. You issued these new SDRs. It’s not quite free money, but it sort of is. And then you’re going to recycle that in poor countries at no cost to you and then put at least a third of it in ODA. It’s not really good, ”the civil society source said.

Another civil society source who spoke to various government officials said there were “concerns” within the Foreign, Commonwealth & Development Office over how UK SDRs would be counted as ODA. .

“It’s a very basic problem because the SDRs sort of were magic out of thin air. It’s not coming from UK spending in a real sense, ”added the second civil society source.

But Lee, who now works as chief economist at Oxford Policy Management, and others have suggested it is possible for the UK government to distribute SDRs without damaging the already tight 0.5% aid budget.

“It is a conventional but also a political decision” to count SDRs in the aid budget, resulting in the treatment of the aid target as a floor and a ceiling, Lee told Devex. He added, “You might find a device that allows you to mine SDR in a way that doesn’t count as ODA. … There is no budgetary effort.

If the entire SDR reallocation was charged to the one-year budget, much of the bilateral program would have to be scaled back to stay within the 0.5% threshold, he said.

While there has been considerable support for reallocations to low-income countries from governments – particularly the United States and France – civil society organizations and advocates have worked to ensure that ‘they can derive maximum benefit from it.

The advantage of SDRs is that they are a flexible tool and do not contribute to a country’s debt level, Oxfam’s Daar told Devex. They should be transferred in an additional way, as concessional as possible and with as few conditionalities as possible, she added.

More reading:

► UK government faces surprise vote on aid cuts

► British aid in 2020 reduced “more drastically than necessary”, according to the watchdog

As the IMF and the G-7 and G-20 country groups continue to discuss SDRs and how they are reallocated this month, they should work to make the mechanisms flexible and concessional through low or zero interest rates and long terms, as well as making sure they don’t have a lot of terms or requirements, she said. While many of the mechanisms discussed are at the IMF, there are more than a dozen organizations that may hold SDRs, including multilateral development banks, which could also receive or lend the assets.

SDRs could be used to pay dues or fees to international organizations – for example, the upcoming International Development Association replenishment, Lee suggested. If the UK chooses to do so, it could potentially regain the 0.7% target “at no additional cost to the taxpayer,” he said.

The UK government did not respond to a request for comment at the time of publication.

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